Too early to change investment course, strategies, say top PE players

The global coronavirus pandemic might have altered the world in ways nobody imagined or predicted but private equity (PE) players said it is too soon to evaluate if a change in their investment course and strategies was in order.

“Until we come to a point where we understand the long-term implications of this year’s events, whether the degree of what we’re experiencing now is sustainable or not, and what a so-called new normal might look like right from where we can then derive new investment thesis and visions, it’s very difficult for us to be talking about any sort of shifting,” Thomas Lanyi, managing director at CDH Investment Advisory Private Limited, said during the Asia PE-VC Summit 2020.

Lanyi was part of a panel speaking on “How the macro context of private investment has shifted,” along with Cyrus Driver, managing director, Private Equity Asia, Partners Group, and Rodney Muse, co-managing partner at Navis Capital.

Driver and Muse agreed that it is still too early for PE investors to change course, even with COVID-19 resulting in a global economic slowdown and an ongoing trade rift between the US and China.

“It’s probably a bit early to be making too many conclusions around the long-term impacts of what’s happening. We are far from having exited this crisis. I think we are probably only at the very beginning of understanding its impact, in part, because some of those consequences are potentially delayed,” Muse added.

One of the trends that the PE executives noticed to have gained momentum during the pandemic is the shift to online adoption. Driver said businesses that have an online component to them or those that use technology and do not depend on a physical site are COVID-resilient.

“I don’t think you can shape a five-year fund strategy based on how COVID is playing out right now except that there are a couple of trends that we think will be durable… we increased technology focus resources both on the investment side and the operating side and we think that was a trend that was already in existence and is further speeded up for this reason,” he stressed.

For Muse, remaining disciplined and flexible were key to remaining afloat as the recovery from the health crisis remains unclear, with other countries in Europe seeing a resurgence of COVID-19 cases.

“I can only say we’re not out of it. And the problem is the shape of the recovery is unclear to all of us. I have industrial businesses where I don’t have demand visibility two quarters out. I have consumer businesses where we’re still shut. And then I have healthcare businesses that probably thrive nonetheless. We probably have to remain disciplined and flexible,” he said.

The playbook in Asia

The COVID crisis is still far from over in this part of the world but some countries in the region seemed to have started the recovery process. PE firms, however, remain cautious saying many parts of Asia have not outrun other countries in handling the pandemic.

Driver said that while Australia and New Zealand have done a “phenomenal job” of handling the pandemic, the effects on businesses and investments have not translated immediately.

“We’ve become much sharper in our scrutiny of trends and sectors as a result of COVID, as a direct implication of COVID, rather than a choice of geographies. We continue to invest around the world,” he added.

Lanyi, on the other hand, said CDH Investment is reprioritising on a geographic basis as the firm is affected by the fact that several of the markets that it used to do business in are far from exiting the crisis.

“We essentially narrow down our funnel to countries we have a relatively high degree of comfort with, countries we would have done deals in the past, sectors that we feel we understand well,” he said.

Are PE firms reevaluating strategies to favour pure tech?

Digital health tech, automated online solutions, e-commerce, and other businesses in the pure tech sectors have boomed during the pandemic as lockdowns and quarantine orders have accelerated their adoption. 

However, Lanyi said the pandemic did not alter his firm’s thinking around technology per se. He added that the adoption of certain solutions and trends may have just benefited certain tech businesses.

“As I’ve repeatedly said, it is yet to be seen how sustainable the trends are. Some of the trends around acceleration will be sustainable, but I equally anticipate a reversal on some fronts. So I think we are yet to understand this famous new normal going forward. From that perspective, we haven’t made any fundamental calls one way or another,” he said.

For Partners Group, Driver said his firm is considering looking at opportunities in the pure tech sector, which he described as “unprofitable consumer internet businesses with presumed explosive growth.”

“Our own internal thought process is evolving to the point that we think being on-trend has such disproportionate rewards these days and being off-trend has such disproportionate risks that we could look past the immediate profitability of business models,” Driver added.

The firm, however, is still undecided on whether to invest in consumer internet or in other sectors in the pure tech space. “There might be other parts of technology where we’ll take that bet, but we haven’t done it yet,” he said.

ESG investing in Asia

Private equity firms are more focused on ESG now than they were five years ago, according to Muse, as global competitors are not keen on buying businesses that are ESG-deficient.

“They won’t take the risk. Why risk their brand for your little, my little mid-market business? We have to be at their level or even above,” he said.

In Asia, however, Muse said most mid-market family businesses in the region were ESG-deficient. This could mean their safety standards inside a factory are probably lacking or their treatment of industrial waste may be at their lowest level. Instead of moving away from these businesses, Muse said Navis Capital sees value creation in them.

“Going in and fixing that (ESG deficiency) should rerate the business that we own. So eyes open, know that the business you’re buying probably isn’t at the level it needs to be but identify those deficiencies and address them,” he stressed.

For Driver, COVID-19 has not been a trigger on the ESG side but the pandemic has accelerated efforts for stakeholder engagement. He added that the focus on ESG has been growing every year and it will last even when the pandemic is over.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.